Making Most of Used Cars

The tragedy of March 11 in Japan has affected so many lives it seems almost sacrilege to reduce it to a business item, but respectfully, it is certainly beginning to affect our industry's business and the short-term decisions we, as retailers, must make.

In the U.S., new-vehicle inventory and sales (not only Japanese nameplates) are beginning to be impacted as a result of the natural disaster. In addition, parts shortages appear to be increasing, which will eventually affect dealership fixed operations.

From a new-vehicle sales standpoint, a lesser supply of inventory has wide-spread implications.

In addition to the lost sales and associated gross profit, we have to consider the lost interest credits, our cooperative advertising which is based on shipments and our lost pre-delivery service.

It also stands to reduce the income of our variable personnel who may fail to meet their minimum income requirements.

Unfortunately, there isn't the flexibility in our overhead structures to allow them to be reduced as quickly as needed when situations like this occur. So where do we turn or what do we do to replace this potentially lost revenue?

The obvious answer is used vehicles. But, as we all know, there is not an unlimited supply of those available for our choosing.

Used vehicles have been in short supply for a while and now. With the traditional numbers of new vehicle trade-ins being removed from the equation, there is a higher level of competitive pricing and inventory-availability pressure on the franchised dealer.

Without fail, when speaking to dealers about their used-vehicle operations, I hear about the challenges they are facing with the availability and high prices of used vehicles in the wholesale marketplace. This situation presents us with another dilemma.

Speaking in generalities, in the not too distant past, many dealers did not have a strict aging policy, which often resulted in wholesale losses higher than acceptable. As dealers have become more disciplined in their aging policies, wholesale losses have been reduced.

As an industry, we've learned our pre-owned operations become more profitable by focusing on our used-vehicle dollar inventory turn and not allowing our vehicles to age past 45 to 60 days,.

Industry studies consistently show our highest used-car gross profits come during the first 30 days a vehicle is in inventory. After that period, with a very few exceptions, gross per vehicle retailed dramatically decreases.

In addition, these same studies show our greatest wholesale losses are directly associated with vehicle aging, as are our holding costs.

So, coupling the study results just mentioned and the fact that there are a limited number of used vehicles available on the wholesale market, should I abandon my aging and dollar turn policies? Why would I dispose of a vehicle when the chances are that I will have to pay more to replace it if I can even buy it?

The first question I would ask is why the vehicle hasn't sold in the allotted 45 to 60 day time period?

Has the dealer or general manager personally inspected and driven each used vehicle which has been in inventory 30 days or more?

This one step will, most likely answer the aging question and let you know why your sales personnel may be walking past these vehicles. Is it not reconditioned properly or is it priced too high?

Does the vehicle fit the historical sales profile of your dealership or have changing market conditions, such as fuel prices, reduced the attraction of the vehicle to the retail market?

I realize this is easier said than done, but I would urge you to carefully consider your individual situations and to not abandon the industry best practices you've adopted due to these temporary market pressures.

Good selling!

Veteran dealership consultant Tony Noland is at [email protected]

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